인도·남아시아

Foreign direct investment flows are increasingly looked as a panacea for all the development needs of developing countries. They are expected to bring key resources to their host countries such as capital, technology, organisational skills, create jobs and develop new industries, expand the base of manufactured exports and even contribute to productivity improvements in the host economy with spillovers of knowledge brought by them to domestic firms. Therefore, there is an increasingly intense competition among countries to attract FDI inflows so much so that governments see the magnitudes of FDI received as indicators of their success. In this race for maximising flows, one tends to overlook the fact that FDI inflows vary greatly in their quality.

Recent literature has shown that some may bring valuable benefits to their host economies, others may crowd-out domestic enterprises and actually reduce host country welfare. Studies have also shown that host government policies such as screening mechanisms, performance requirements, incentives and pro-active promotion play an important role in determining the quality of FDI inflows.

Although FDI inflows into India have increased considerably since1991, its share would appear too small, especially if it is compared with that of other countries in the region such as China. India has been receiving FDI inflows of about $3 to 4 billion a year that represent a marginal under 2 per cent of total inflows attracted by developing countries. In contrast, China has been receiving over $45 billion of inflows representing nearly a quarter of total developing country FDI inflows.

The comparison of about $3-4 billion in annual inflows of FDI by India with $45 billion of FDI inflows by China is often made. However, the figures of FDI inflows in India and China are not comparable because of several differences. As has been pointed out by an IFC study, the Indian figures of inflows tend to under report FDI by not following the IMF’s BoP manual and leave out the reinvested earnings by foreign affiliates and inter-corporate debt in the FDI figures. FDI inflows in China, on the other hand, are believed to be overestimating the real FDI inflows in view of round-tripping of domestic capital to take advantage of more favourable tax treatment of FDI. Finally, the size of the Chinese economy is much larger than the Indian economy and hence the figures should be normalised. When the Indian figures are revised and Chinese figures are moderated, the gap in the FDI/GDP ratios narrows to 1.7 to 2 for India and China respectively (compared to 0.5 to 3.6 without taking care of these differences).

Therefore, the difference between China and India may not be that substantial as apparent from the absolute numbers in terms of quantity of FDI attracted per unit of GDP. However, there is major difference in terms of quality of FDI. A recent RIS discussion paper shows that a substantial proportion of FDI in the post-reform period has gone to services, infrastructure and relatively low technology intensive consumer goods manufacturing industries. It has been largely oriented to exploiting India’s domestic market and very little to export-oriented production. As much as 40 per cent of FDI in the late-1990s in India has also taken the route of acquisitions rather than greenfield ventures. Greenfield ventures generate more favourable development effects for the host economy compared to acquisitions of existing enterprises.

 In China, FDI is concentrated in export-oriented and high technology manufacturing industry and has come largely in the form of greenfield ventures. As a result, FDI accounts for over 45 per cent of China’s manufactured exports and as much as 80 per cent of high technology exports. Thus FDI is largely behind China’s emergence as a manufacturing hub of the world. MNCs have built thousands of factories which churn out goods for the world markets and in that process created millions of jobs. This way the benefits of globalisation have affected the lives of common people and a trickle down has happened.

To some extent, the export-oriented production model is being replicated in India in the service sector where  MNCs are either subcontracting software development and other business processes to Indian service providers or are setting up their own subsidiaries to do that. However, India’s emergence as a services hub is unlikely to do what export-oriented manufacturing has done to China. With all the hype surrounding it, the services revolution has generated only less than a million jobs. Furthermore, these jobs have gone to trained professionals who would have perhaps found some jobs any way and not to semi-skilled and unskilled workers. Hence, India’s services revolution has a little chance of addressing the jobs and poverty issue. An export-oriented manufacturing hub model needs to complement India’s services hub for addressing the challenge of job creation while also generating output and manufactured exports.

Export-oriented FDIs also have other favourable externalities of information on export potential for domestic firms besides transfer of world’s best practice technology to the host country. The export-oriented FDI minimises the possibilities of crowding-out of domestic investments and generates favourable spillovers for domestic investments by creating demand for intermediate goods.

In this context, the experiences of Southeast Asian countries such as China, Malaysia, Korea, Thailand in channeling FDI into export-oriented manufacturing through selective policies and export performance requirements imposed at the time of entry deserve careful consideration. India’s own experience with export performance requirements — directly or indirectly have been successful in inducing MNCs to exploit India’s potential for export-oriented production as documented by RIS in food processing and auto industry. Export-obligations are fully consistent with the TRIMs agreement and can still be employed without a problem. Essentially, the challenge is for India to effectively leverage her attraction of a large and expanding market for new entrants to push them to accept export commitments as in China. In this process, a pro-active targeting and promotion of export-oriented FDI could also be useful for exploiting the potential of India in attracting export-platform FDI.